The impending X Prize flights of SpaceShipOne make now the time to start considering scenarios for the suborbital industry and planning accordingly. (Credit: Scaled Composites)

Scenario planning for suborbital

by Sam DinkinMonday, July 19, 2004

Scenario planning can help form contingency plans for suborbital companies to thrive whatever the market conditions are. Scenario planning was made popular by Royal Dutch Shell in the 1970s. Shell considered what would happen in the event of a big drop in world oil reserves. It was the only company ready for the huge oil price shock after the Yom Kippur war. Shell has lost its credibility these days because it lied about its oil reserves. Ironic that Shell went from the top of its game to attempting a shell game in one generation. Scenario planning may offer today’s struggling suborbital executives the boost they need now to have a multi-billion dollar scandal three decades hence.

The meat of scenario planning is comprised of three steps: identifying the critical uncertainties, composing scenarios, and analyzing business decision under the different scenarios.

There is substantial uncertainty in the suborbital industry, but much of the uncertainty may not be critical. Regulatory uncertainty may be cabined by the prospect of new language enabling a successful vote in favor of the Senate version of HR 3752 to coincide with SpaceShipOne’s anticipated Ansari X Prize flight in September. Technical risks appear to be manageable. The drum has been beating for a long time on the risks of suborbital, so having a death on an early flight might not be the industry’s biggest risk. The biggest remaining uncertainty may be the level of demand; the critical uncertainty that remains is whether suborbital is going to be a huge market, or a tiny market.

Scenario 1: Boom Town

President George H.W. Bush is enlisted to take the first flight and he has a wonderful time. Seniors everywhere sign up to live the once-in-a-lifetime glory they remember from Alan Shepard’s 1961 flight. Safety quickly proves out. Low prices mean that families can take their kids on the flights. Spaceports pop up all over the country. People have so much fun that they want to do it again. Movie stars and celebrities buy their own (heavily-discounted) suborbital craft to go up whenever they can. Six flags and Disney buy up two of the top suborbital companies as a hedge against declining amusement park revenues as people start taking space camp vacations with Zero-G airplane flights followed by suborbital hops. High market capitalization and rapid growth leads to a half dozen fleets of suborbital craft. Several new transportation titans emerge as six major players leverage their operations, design, and business expertise to build competing orbital vehicles to serve the new Budget Spotel.

The high demand scenario means that the market will eventually reach a low price. High utilization will spread development and other fixed costs over many more users. Once production and operations get going in earnest, there will be no scarcity and prices will drop below the cost of some operators. Low-cost operators like Southwest Airlines will grow and prosper. Other operators may get a substantial short-term windfall if the lowest cost operators take their time to build capacity to satisfy demand.

Operators that successfully launch suborbital vehicles will be like alchemists that turn lead into gold. Operators that can only operate at high prices will fall victim to the alchemists’ paradox: the price of gold will fall to the price of lead.

Operators that can only operate at high prices will fall victim to the alchemists’ paradox: the price of gold will fall to the price of lead.

If there are millions of people willing to spend $10,000 to take a suborbital ride, then the market is not a national market. If there is $10 billion in nationwide demand, there will need to be many regional spaceports because travel time and expense will make up a substantial portion of the cost of the suborbital ride.

Liability concerns are likely to make each operation at each spaceport independent. The model will look more like a franchise model like Starmart’s than a national chain of corporate stores like Starbucks.

Rapid growth will lead to specialization as companies find that they can grow faster by outsourcing non-core business processes. The service providers are the biggest winners in boom time. Levi Strauss is a great story from the California Gold Rush. Many support services could become the next Levi’s. Travel agencies, space-camp trainers, regulatory support consultants, industry analysts, and space marketing services should all be viable.

The productivity gains from specialization can be tremendous. In Adam Smith’s pin shop in The Wealth of Nations, Smith estimates that a person working alone can make 1-20 pins per day while a team of ten separate specialists—one cutting the wire, another grinding it and so on—can make 48,000. That’s a gain from specialization of between 240 and 4,800 times as much productivity.

Right now, most of the suborbital entrants are not specializing. MSNBC quotes Jeff Greason, CEO of XCOR Aerospace:

Right now, more than 20 teams are all working on “the fun parts” of suborbital spaceflight, Greason said. But eventually, some of those teams will come up with solutions to the not-so-fun technical problems — and start selling those solutions to each other.

Without specializing, firms will be caught flat footed by the boom. They will struggle to meet demand and end up with a piece of the market that is too small to be viable.

The main challenges of Boom Town are keeping up with growth and minimizing unit costs.

Scenario 2: Dullsville

President George H.W. Bush is enlisted to take the first flight and he throws up in the pilot’s lap. There is a very low take-up rate. Mojave and Oklahoma are the only two spaceports still running after three years. There are only three operators in service with weekly flights. There is no specialization. Prices remain high due to low utilization with flights occurring once a week. Operators scramble to find science customers to fly a few extra flights. The media remains very interested given the amount of commerce, but the story fades. The operators struggle to raise revenue. The Department of Defense tries to help out with research contracts to keep the prospect of cheap suborbital and orbital alive.

Without specializing, firms will be caught flat footed by the boom. They will struggle to meet demand and end up with a piece of the market that is too small to be viable.

With low utilization and little to do between flights, operators have to be more versatile. Fewer participants means that there is less specialization. The market is national so franchising does not happen. Patient operators may find that the market grows over time. Extremely tight fiscal planning, patient accumulation of happy customers and operational improvements are the order of the day. CEOs have plenty of extra time on their hands to try to identify funding sources for orbital. Cost cutters that can eke out a profit with low revenue can survive to the next round.

The main challenges of Dullsville are keeping total costs low and scrambling for all revenue sources.

So which companies can manage both a steep ascent and an unpowered glide? The ones that use scenario planning may go from rags to riches overnight like Shell after the Yom Kippur War. Or perhaps companies that use scenario planning will get to the top of their game in thirty years. But whichever scenario ultimately occurs they will be ready, not shell shocked.

Sam Dinkin is a regular columnist for the Space Review. He is an investor in XCOR Aerospace. He can be reached at thespacereview@dinkin.com and 888-4-Dinkin.